Martin André Dittmer Frederik Jakobsen July 29 2021 Competition Appeals Tribunal decides on information exchange in dual distribution cases Gorrissen Federspiel | Competition & Antitrust - Denmark Martin André Dittmer, Frederik Jakobsen Competition & Antitrust FactsCompetition CouncilCompetition Appeals TribunalCommentOn 23 June 2021 the Competition Appeals Tribunal (CAT) upheld two separate decisions of the Competition Council involving the illegal exchange of information between the brand Hugo Boss and two Danish clothing retailers, Kaufmann and Ginsborg, respectively. The CAT agreed that the parties' exchange of information on prices, discounts and quantities in relation to future sales on the retail market constituted an infringement by object of section 6 of the Competition Act (CA) and article 101 of the Treaty on the Functioning of the European Union (TFEU).FactsHugo Boss is an international manufacturer, supplier, and retailer of clothing items of its own brand, while Kaufmann and Ginsborg are Danish retailers of clothing from different brands, including Hugo Boss. Hugo Boss operates a dual distribution system in which it manufactures and supplies products to Kaufmann and Ginsborg, and at the same time distributes products directly to consumers. As Hugo Boss is active as both a wholesaler and retailer, it has a vertical as well as a horizontal relationship with Kaufmann and Ginsborg. Therefore, at retail level, Hugo Boss is a competitor to Kaufmann and Ginsborg.The exchange of information started as an enquiry by the retailers, to which Hugo Boss responded by providing detailed information about the future sales of Hugo Boss's retail division. This continued with ongoing discussions on information of a competitively sensitive nature. Based on email correspondence seized in a dawn raid, the Competition Council found that Hugo Boss and Kaufmann had exchanged information from January 2014 to November 2017, and Hugo Boss and Ginsborg were found to have exchanged information from December 2014 to April 2018.Competition CouncilAs a supplier, Hugo Boss has a legitimate need for information sharing with its retailers in order to maintain the vertical co-operation. For this same reason, the Competition Council recognised in its 2020 decisions that information exchange in a vertical relationship will often not raise competition concerns. Yet the Competition Council found that the information exchange in this case was intended to restrict competition at the retail level, given the horizontal competitive relationship between the parties. In particular, the exchange of information on future prices, discounts and quantities planned by Hugo Boss's own retail division gave Hugo Boss, Kaufmann and Ginsborg the ability to coordinate their future sales, which may have led to a smaller assortment of products on sale, as well as lower discounts.Hugo Boss alleged it had adopted a so-called "Chinese wall" between its wholesale and retail division prohibiting communications and exchange of information that could cause conflict of interest between the divisions. However, email correspondence revealed that the wholesale division had in fact provided detailed information about the retail division's future sales, which led the Competition Council to conclude that the communications constituted information of exchange between competitors.Therefore, the Competition Council found the exchange of information to be unlawful coordination between competitors in contravention of Section 6 of the CA and Article 101 of the TFEU. The Competition Council therefore ordered the parties to cease the illegal conduct and subsequently referred the matter to the Public Prosecutor for Serious Economic and International Crime for criminal prosecution.Competition Appeals TribunalIn line with the Competition Council's decisions, the CAT found that the parties' exchange of information on prices, discounts and quantities in relation to future sales on the retail market constituted an infringement by object in violation of Section 6 of the CA and Article 101 of the TFEU.The CAT rejected the parties' claim that the conduct could benefit from the Vertical Block Exemption Regulation (VBER). Although Article 2(4) of the VBER allows some dual distribution systems to be covered by the VBER, the CAT noted that the relevant conduct in this case was horizontal and therefore not part of the parties' vertical relationship. More specifically, as the information exchange did not concern the conditions under which the parties could purchase, sell or resell the products from Hugo Boss, the relevant conduct did not satisfy the definition of a "vertical agreement" in Article 1(a) of the VBER.The CAT went on to consider whether the information exchange in the two cases should be considered as "by object" infringements. It appears from the reasoning that the CAT was divided on this issue.According to the dissenting opinion, the legal treatment of certain information exchange among competitors as restrictions "by object" cannot, at the present stage of competition law, be extended to dual distribution systems with both vertical and horizontal aspects. Therefore, in the absence of past experience with information exchange in dual distribution systems, a fully-fledged effects analysis should have been carried out instead.In contrast, the majority opinion emphasised that the information that was under scrutiny in the two cases did not concern vertical aspects. Instead, it concerned prices, discounts and quantities in relation to future sales on the retail market where the parties were actual competitors. In line with established case law, such information exchange between competitors is considered a restriction of competition "by object". As the majority opinion found that the legal and economic context supported the anti-competitive object, the decisions were upheld.The Public Prosecutor for Serious Economic and International Crime, who has awaited the decisions of the CAT, must now decide whether to initiate criminal proceedings.CommentDual distribution has developed notably and has become more prominent with the growth of online sales, which has facilitated direct sales to consumers, either through the suppliers' own websites or through online marketplaces. As there have only been few cases involving information exchange in dual distribution systems, there is a need for clarification on the type of information suppliers and retailers may exchange in such arrangements. Hence, the CAT's two decisions are much welcomed as they provide guidance on this issue.The dissenting opinions within the decisions may explain why enforcement action has been rare in such cases, since it is debatable whether such parties' information exchange should be exempted under the VBER, and, if not, whether it should be classified as a "by object" restriction.As the current VBER expires on 31 May 2022, further guidance is to be found in the draft revised VBER and the accompanying draft Guidelines on Vertical Restraints (Vertical Guidelines). The European Commission has just recently published its proposals and on the issue of dual distribution, the draft revised VBER provides for notable changes.In the draft revised VBER, the European Commission chooses to keep dual distribution within the scope of the VBER, but proposes to introduce a new market share threshold for the dual distribution exception. Accordingly, the dual distribution exemption still applies if the parties' combined market share in the relevant market at retail level does not exceed 10%. If the parties' combined market share does exceed this 10% threshold, but the market share thresholds of Article 3 of the Draft VBER (30%) is not exceeded, the exception generally still applies, except for any exchange of information between the parties, which must then be assessed as horizontal information exchange. This question is at the core of the discussions in the CAT's decisions.The CAT's decisions serve as a reminder for suppliers in all sectors to be careful when exchanging information with their retailers if the supplier operates a retail business. As illustrated by the decisions, exchanging information in a dual distribution system may easily exceed the scope of the VBER.For further information on this topic please contact Martin André Dittmer or Frederik Jakobsen at Gorrissen Federspiel by telephone (+45 33 41 41 41) or email ([email protected] or [email protected]). The Gorrissen Federspiel website can be accessed at www.gorrissenfederspiel.com.